How to Explain Cash Deposits When Getting a Mortgage

Written by Posted On Tuesday, 13 October 2020 06:20
What You Should Know About Cash Deposits What You Should Know About Cash Deposits

Tips For Proving Cash Deposits Are Legit

Once you've found your perfect home, you'll make an offer, and hopefully, it will be accepted. Once that happens, you'll be required to come up with an earnest money deposit, which is another name for home deposits. A house deposit is considered the glue in a real estate transaction because it gives a buyer incentive not to pull out. After all, who wants to lose thousands of dollars. Sellers and real estate agents look at your deposit as a token to show you're a serious home buyer.

Once your earnest money is safely in place with the real estate agency, you will move on to the home inspection and then applying for a mortgage. If your credit score is looking good and you haven't missed loan payments, there shouldn't be a problem, should there? Most of the time, if you've been pre-approved for a loan, that is exactly the case. Unless, of course, you have been moving cash around.

If your lender finds a cash deposit you made into your account, there could be a problem. If that happens, your mortgage could be delayed, despite you knowing the money is from a legitimate source.

When applying for a mortgage, you have to make sure any home deposit into your bank account can be explained. If you are buying a house for the first time, this is something you've probably not given much thought to.

Let's review the issues surrounding cash deposits when getting a mortgage, so you're better educated on the subject.

What is the Problem with a Cash Deposit?

The lender is required to make sure all of your income is from legitimate sources. They also need to be sure that you haven't been loaned the money to make your application seem better to the lender. So, any large house deposit, when you are about to apply for a mortgage, could be reviewed by the lender.

It doesn't only mean cash deposits; any transfer of funds into your accounts, whether savings or checking, could be a problem. Checks and wire transfers into your account are treated in the same way as cash deposits. You should review this with your mortgage broker upfront if you need to.

Reasons Why You Might Need to Deposit Money When Homebuying

There are many reasons why you would need to pay deposits into your account during the home buying process. There are many things to pay for, and they're rarely cheap. The mortgage itself will include set up fees, and you need to have the down payment ready as well.

Down payments will be up to 20 percent of the purchase price of the home. The amount you pay as a down payment will affect the mortgage terms, with lower percentages leading to more costs throughout the loan. There are some instances where you can avoid a down payment, but it is normally a requirement.

You also need money in your accounts to pay the closing costs, inspection fees, and moving expenses. All these costs can quickly add up, and it isn't surprising that some homebuyers spend many years saving up to afford to purchase.

What Your Lender is Looking For

The lender you choose to provide your mortgage wants to be sure that you are going to be able to stick to your payments. They will look at your financial history to see if you have successfully repaid loans in the past, whether you can afford the loan on your income, see if you have a good credit score and if you meet the requirements for that type of mortgage.

Any unusual and large deposits in your accounts could appear suspicious. This will lead them to investigate your application further to make sure everything is as you have claimed.

What Sort of Deposit Will Cause Problems?

While you might expect a large deposit to draw more attention, that isn't necessarily the case. They are more interested in deposits that are out of the ordinary for your account. If you regularly have large deposits, this won't be a concern compared to unusual account activity.

If you have a deposit that isn't from a source that makes sense to the lender, they might look further. This is more likely to happen if the deposit is above a quarter of your monthly income.

What won't cause a problem is large deposits that happened three months or more before your application. The lender will only ask for a few months of account statements, and any large deposits before that won't be looked into. The money already in your account will be considered your savings, and they are unlikely to inquire further.

Proving Your Deposits are Legitimate

If the lender asks for more information on the house deposit in your account, you will need documentation as proof. Having a receipt or a letter explaining the money will probably be enough for the lender. If the deposit was a gift, you would have to get a letter from the person who gave it to you, explaining that they don't expect the money back.

Some sources of money could prevent the lender from approving your mortgage with them. If, for example, you have taken out a personal loan to contribute to the down payment, this will be an issue. Another monthly expense like this will change the lender's calculation and could mean they have to begin the approval process again.

Final Thoughts Cash Deposits

Make sure you read the terms of the contract with the lender so that you know what is allowed. Then avoid doing anything that will breach the rules. If you have already made deposits, make sure they are from allowable sources and get the documentation ready in case the lender asks for it.

Hopefully, you now have a better understanding of how unverified cash deposits can make your life miserable when buying a home. Making sure you have a paper trail of all of your deposits will be vital, especially when they are cash.

If you have any concerns about your cash deposits, make sure you speak with your lender or mortgage broker upfront about it.

About the author: The above article about how to explain cash deposits when getting a mortgage was written by Bill Gassett. Bill is a nationally recognized Real Estate leader who has been helping people buy and sell property in the Metrowest Massachusetts area for the past thirty-four plus years. Bill has been one of the top RE/MAX Realtors in New England for the past decade-plus. His blog, Maximum Real Estate Exposure, is the most visited real estate agent website in the US.

His real estate advice has been featured on CNBC, RIS Media, National Association of Realtors, Today.com, Inman News, Placester, Credit Sesame, and others.

Bill covers real estate sales in the following Massachusetts communities: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.

Reach out for Bill's advice anytime you need it.

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Bill Gassett

One of the top RE/MAX agents in New England over the last decade plus. Providing exceptional real estate services to buyers and sellers in the Metrowest Massachusetts area including the following communities: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.

See my real estate website at Maximum Real Estate Exposure - one of the most visited real estate sites in Massachusetts.

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